The Significance of EPA’s Proposed Power Plant Standards

Although they won’t have immediate impacts, EPA’s proposed rules for new coal plants will indirectly help shape the future of the industry.

Power Plant Emissions

There’s an uproar over EPA’s proposed rules for CO2 emissions from new coal plants, even though no one expects anyone to build a new coal plant for at least a decade. I’ve argued (here and here) that the industry won’t have standing to challenge the rules because they won’t have any imminent impact. In fact, a new report from the Congressional Research Service calls the rules “symbolic,” which bolsters my standing argument. But the body of the report also suggests that, despite their lack of immediate impact, the rules are really significant in less blatant ways that may not establish legal standing, but do really matter.

First, issuance of rules for new plants will open the door for a further round of rule making under section 111(d) setting CO2 standards for the existing fleet of coal-fired plants. Given the importance of coal in the U.S. fuel mix, reductions from existing plants would be quite meaningful. Changes would probably be incremental, such as mandates to increase efficiency, but the added investments could be one more factor tipping the balance more in favor of renewables and natural gas.

Second, because the rules would require carbon capture and sequestration for new plants, they would boost development of the technology. For instance, state utility commissions would be more prone to support construction of demonstration plants if EPA requires CCS for new plants.

Finally, the rules would send a message to the rest of the world, including countries like China that rely on cheap coal, that the U.S. considers CCS to be the future of coal. Those countries are going to be building new coal plants — a lot of them — and in the long run their policies about coal will matter much more than ours will.

In short, EPA’s new rules could be quite consequential. This doesn’t mean that the industry would have standing under current Supreme Court doctrine. Don’t forget that when Congress substantially expanded NSA’s surveillance powers, the Supreme Court said that not even the people most likely to be wiretapped had standing to challenge the expansion. Policy impact and “concrete injury-in-fact” appear to be two separate things.

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Reader Comments

I agree that given current gas prices and one assumed trajectory of prices (EIA’s), the rules are symbolic. No costs and no benefits.

But you have to really really believe in the price forecast for gas to believe that they won’t matter over the next decade. If the history of natural gas policy and pricing teaches us anything, its that the price is highly volatile and very dificult to forecast (see EIA retrospective analyses of the AEO to see what I mean). Unless one places absolute faith in the EIA forecast, you have to include some nonarbitrary probability that gas prices end up on the high side in the relatively near term in which case these rules have a cost.

Another way of putting this is to say that the CBA that lies at the heart of the 111(b) rule relies critically on a point estimate of future gas price when what it should do is rely on a PDF of expected prices. With a PDF, the rule would impose real costs in present value terms.

We should be honest in saying that this rule is a one way ratchet in the face of significant market uncertainty and that is not costless. Climate policy is not a free lunch. Otherwise, I fear that if the forecast turns out to be wrong, there will be an argument that the rule should be changed because it was adopted under false pretenses.

Michael–It would be nice to hear from an energy economist about this issue. It strikes me as quite complicated. Just from the economic point of view, the decision to build a new power plant is a complicated decision, depending on forecasts about future fuel prices over the multi-decade lifetime of the plant, the option value of waiting for more information before deciding what to build, future regulation-related costs, and the possible value of hedging against volatility in other fuel markets. On top of that, there’s the regulatory overlay of whether PUCs will allow view the investment as prudent in states that still regulate electricity prices. Thus, the calculation obviously goes beyond a comparison of current fuel prices or even of projected average prices. So the question is whether, , these factors would add up to a decision to build a new coal-fired plant within the temporal window over which EPA can reasonably forecast costs. The RIA is here: http://www2.epa.gov/sites/production/files/2013-09/documents/20130920proposalria.pdf

Thanks for the link. Looks like EPA has more or less covered their bases on this – see section V of the RIA. Assumming that their high gas price scenario really is worst case, then no utility is building coal no matter what happens. It seems like the key issue in the analysis is the CUA (3% added to capital costs for carbon intensive projects due to regulatory uncertainty). It’s certainly the case that this sort of adder is part of the economic justification for the new Vogtle units and for the Kemper County IGCC project. So perhaps it makes sense to include it. On the other hand, it strikes me as potentially circular to include it as part of the baseline scenario in a regulatory analysis of the rule that will add those costs.

In other words, utilities add the CUA to their investment planning precisely because they fear 111(b) rules for GHG. Should the reference scenario include this fear (and its shadow price) or should it assume that the fear does not exist because the reference case is supposed to model only existing rules and not future rules or expectation thereof? Not sure what the answer is. Do you have thoughts?

That’s a really intriguing question. It seems to me that EPA should discount the cost of regulatory uncertainty as it pertains to section 111, because after all EPA can dispel that uncertainty in this very proceeding. On the other hand, there are a lot of other regulatory uncertainties relating to new coal plants, and my intuition is that EPA should be able to take the impact of those uncertainties on the industry into account. I can imagine counter-arguments, however, particularly to the extent that the uncertainties relate to other possible EPA rule makings. I wonder if there’s any analogy to be drawn from the regulated utility context, where one risk factor influencing the rate of return is uncertainty about future PUC actions.